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tv   [untitled]    September 23, 2010 5:30pm-6:00pm PST

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the system we are in now to lay funded system. there are not a lot of options here, but i think the city has made extremely significant effort to understand the liability, report it in public and take actions to address it. you all have been aware of this at you have -- as you have sat on the budget committee as well. it does start to feel like it is crowding other expenses that the city wants to be able to afford. that is true, and if we are going to control the overall cost, we're going to have to work at that percentage of payroll contribution that is projected for pension costs and try to bring it down so that the overall program remains affordable. >supervisor chu: what about
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propositions d and b, were looking at retirement benefits and when they start, so on? is that a part of what we were doing at the time? >> it is. looking at what mr. wagner said, this is not news. it got substantially worse with the downturn of the economy and the falloff of pension trusts. in the time that i have been working at the office, we have been working on the underfunded liability that is represented by the costs. and we have had several task forces over the years. we worked to make rate and plan structures that would help control the aggregate cost of the health service itself.
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proposition b was a significant effort to get the new group of employees coming in getting it to a funded cost over time. it is a long project and we will not start seeing the benefits of that for some years, but among the narrow band of options, it was an important step that the city took. prop d was the same thought process. there were several different configurations of how we might change the benefit contribution here, the contribution rates. they were debated here. projections were given. it'll be a few years before it starts to really impact of the operating cost, but both are
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significant steps that the leadership has taken to control these costs. another one that is not necessarily important to other agencies, one of the seeming accusations is that the cities have failed to disclose what the liabilities are. it has been a real issue here in san francisco. i think san francisco is significantly out in front or there is a requirement for us to do an actual estimate. we had done that years before it was a requirement to do so under the government accounting standards. i mention that as another element of work that is important in this area. >> i just wanted to add to of
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one of the most significant elements of prob b, the health liability, we are now one of the very few agencies in the country that requires employee contributions towards health in the same way the pension is funded. in addition, the report later on speaks about medical benefits of 10 years. that is not the case. new hires since january of 09 can not access full medical until after 20 years of service. there are a number of other changes as well. it remains a challenge for the people -- anybody hired before
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january of 09, their collective bargaining negotiations. supervisor elsbernd: someone who is involved in both the drafting of propositions b and d, it is important that it be pointed out that what it did on retiree health only applied to all employees hired after january 1, 2009. but the pension side increase to the pension for all current employees. in the short term, prop b has cost tens of millions of dollars. will not see the cost savings until we have a full generation of new employees hired. we will not see cost savings for
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a couple of decades. in terms of termsd -- poposition d, that is only in terms of new hires. these are, frankly, baby steps. they're not going to do anything about the increased contribution that we will see the following year. the savings are really only substantive on a 20 or 30-year window. >> i can understand that, but i think that the question was, are we not doing anything towards some of the issues that the grand jury mentioned? i still think that proposition d and b were an attempt to be aware to do the best that we can.
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i don't think this is -- it is not like we're not looking at this. the five-year plan the think was proposition a, it will also help look at some of the issues we're facing. we also need to understand that one of the reasons we are in this situation is because of greed, people stealing money and getting away with it, not because the city did something we should not have done. all over the country, pensions, the fact that we invested the way we did is what people do publicly. public funds do that. every public funds and municipalities lost money the same as we did. supervisor chu: just moving the
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conversation along, it says that they are protected by federal and state constitution provisions prohibiting impairment of contract. do any departments disagree with that. if we could go on to the next finding. it mentions the grand jury reports in the health benefit costs are expected to increase from the current fiscal year, the city cannot realistically afford it. the current pension rules are increasing the contribution rate to 9.9%, and 30% by 2015. it will make it hard for the city to sustain funding by fire, public health, etc..
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there is always a number of assumptions associated with these numbers as well as others. if the retirement system could respond to that and what kind of assumptions underlying these numbers? >> you're referring to fb-1, correct? the system partially disagreed with that answer. the primary disagreement is that the system itself neither determines benefits which is done by the voters, and benefit levels, nor do we determine the funding methods or payment sources. that comes through the city itself and we don't do that. a large portion of the dollar figures referenced here deal with health benefits. the retirement benefits have nothing to do with the cost
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benefits or anything related to the health benefits. the 30% rate that was referenced in the report is an estimate. it is a long-term estimate provided by the independent firm. supervisor chu: the 30% contribution rate, in 2010, it was 9.49%. there is no disputing those facts. the estimates going forward about 2015 being 30%, what are the underlying assumptions there? is that realistic? what are we assuming in our numbers if we're going forward? >> it is the report of the independent actuarial firm. the numbers that the grand jury reported to you or numbers that we reflected from the report.
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they do base it on assumptions. assumptions can change over time, but that is basically all any pension system has to go on. >> i was going to mention that the underlying assumptions were assuming that we return 7.75%. we returned in excess of 12%. >> if i am reading this response from the department, that is different from what you're saying. it says that the employee contribution rate referred to is actually a worst-case scenario where the trust would be 4.5% returns? >> they must have showed them that chart. in fact, we got a 12.5% return in the first year following the bad financial -- >> it had it going to about
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27.5, 28.5%. >> the retirement board was to show returns. there is a worst-case scenario of returning the zero. they showed returning 7.75. they also showed them a turning higher to establish an influence so that we had an idea, and again, the 30%, this is not a real number. we know it was 9.49% last year. we will be setting it for the following year at the january board meeting. as presented to the retirement board, it is an estimate of projection for illustrative purposes only with different
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scenarios presented to the retirement board. >> is it safe to say that is not necessarily incorrect, however, it leaves out information about what other scenarios could be? it basically highlights the worst case scenario of an annual basis, but in terms of our own experience, we might see 9% returns, up 13% this year? that could be different? >> the best way to characterize this is that this was a projection prepared by the actuaries. they would not say it is an estimate or where they think it is going, because they can't project with the returns are going to be for the next few years. instead of saying a 30% is something that the actuary predicted, it was a set of high numbers at lower numbers that they presented to the retirement board. they never said it was going to
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be 30%. they said that these assumptions were worthy actuary would go. >> in terms of predictions using numbers, the three-year projections and your scenarios for next year's budget, what are we assuming? >> the budget projections assume the retirement system in some numbers that they just discussed. we have a joint report three- year budget projection assuming the same numbers the retirement system adopts. >> which scenario is it? >> you assume a middle ground?
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>> today have anything at this? supervisor maxwell: the analogy is useful here, where frequently when they published the report, we get the question, does that mean the office is saying we're going to have a deficit budget in three years? that is not what it says. between today and that day, deliberate steps are taken to balance the budget and address the scenario. when the second and third year comes, we will have a balanced budget. that is a useful way to think about this series of projections. it gives a range between then and now. the financial management will take steps to try to address it. and the retirement contribution rate going up next year, as with any of these projections, the
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near term is quite reliable and the far turn is a murky. you don't know what is going happen. >supervisor elsbernd: even the actual reports, even in the rosiest of scenarios, we are still going to see the employer contribution at least double within the next few years. >> we lost over $3 billion. let's say $3.5 billion. that means over the next five years, we're going to recognize $700 million of that lost. if you look at the charts that
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were provided by the civil grand jury in the whole set of charts provided to the retirement board, it shows after that five years when we have retired the last installment of the money that we lost, it tapers off and start reducing. we are into the third year of a five-year loss. so we have three more years where regardless of what we make this year, we're going to have recognized that loss. once that is done and we have regular return years over the next three years, the actuaries are projecting in the same way that these are not real numbers, they will level off and they will decline. if you look out, we are about a
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10% employer contribution rate. these are for illustration purposes only. these are to provide some areas under which the board makes decisions on investments. >> and we're talking about investment return, we talked about a few of the other assumptions. some of those other elements that go into what gives us this number? >> they require the actuaries to look back at service and match up all of the demographic assumptions, a rate of retirement, rates of death. it is what we call the demographic. we just completed the study. the main findings were that there needs to be different
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assumptions for non-safety members for people that have less than a 30 years. overall, the retirement rates were higher than we had been assuming long-term based on the experience they looked over the five years. termination rates were higher. it is most likely due to the lay off and the budget situation. in november, they're going to be looking at economic assumptions, which is wage growth, cpi, rate of return. they want to fine tune it down to where there are not employer contributions. if you look at before we lost the $3.50 billion, the contribution rate was in the realm of 04%-6%.
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that is what the retirement board is striving to maintain. when we lose $3.5 billion, it is an extraordinary event. if we get back to where we are making 7.5% or 7.75%, the contribution rate is assumed to go down, and they used to tell everybody, there is a 10% employer requirement to find your benefits, the benefits promised to the employees. if we ever got down to a 10% contribution rate, i would never speak for her while she is working, but she used to always say that 10% is what the employers should expect to pay, even with a very healthy plan. when we look to the realm of going to 30, that is far away.
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but if we get back to 12, 14%, that is where the shady -- city should expect to be. >> that opens the door to highlighting one of the strongest pieces in proposition d. if that employer contribution falls below the normal cost which is right around 10%, the city will still have to contribute that delta. if employer contributions say 2%, the extra 8% most of the deposited to the retirement fund or to the trust fund. we will start to help hedge against what we're seeing now. if it had been in place 10 years ago, we wouldn't be experiencing
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anything like we are experiencing today. i think it will come up in one of the later findings, we assume a 4.5% wage increases across the board every year? >> the assumptions recommended and have been in place for 20 years assume that there is a component of wage growth at 4.5%. there's also another 1.5% of attributable to new employees that just in year one is through 3, those can be significant increases. the basic growth of wages without consideration for promotions, it is soon to be 4.5%. that is what they're going to be looking at based on the information we sent them on the last year of retirement data, to
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find out if it is long term, still a valid assumption. they are looking out for years, a minimum of 20 years, and they don't try to react to budget cuts during a two-year period or flat salaries. they look at the history of the employer, whether there has been long term sustained growth of wages. that is how they said the assumption. supervisor chu: what supervisor elsbernd spoke of earlier, that is something that will go a long ways to smooth out the cost over time. truly, when we lost the $3.5 billion because of the general nature of the economy and stocks
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going down, our pension fund lost out on that. we are making up for it by trying to catch up where we were. several years ago, we had $3.5 billion more overall than we currently -- or what we had. that had to do with the stock market general economy. the city's policy has been to smooth out those losses. even if we were earning a pretty decent rate, we would have to make up for that loss over the next five years, and that will be represented in an increase, right? dodge what you said is exactly correct, supervisor. if i could take half a minute to address something that supervisor maxwell mentioned earlier. the systems all of this year has
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fluctuated in value between 13 and $13.5 billion. what i want to point out to you is that our high water mark, it was about three years ago for a sustainable period. there was actually one day where we jumped over 17 billion. even though that was the high water mark, the point to want to make is this. we are using the term $3 billion-loss. i don't like using that term "loss." i don't think it is accurate for this. you don't have a loss until you write it off. i wanted to tell you that we have not been recognizing losses. if you read about other major funds having major write-offs and real estate projects, other
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things that have gone south, that money is never coming back. we don't have any of that in the san francisco fund. we have a declination in value. we are holding these assets and the values hopefully will come back up. over five years, perhaps, but nothing went wrong and nothing was absconded with. we have not had to write anything off. and just wanted to make sure i touched on that. >> in comparison to other jurisdictions, was our reduction in value about the same, similar, if we do better? do we have any sense of that? dodge that is a difficult question to answer. we are anywhere from in the middle to better than average in terms of the declination of value. that is just declination of value. we are far superior in that we
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have not had to write off investment that we put into real estate venture that went belly up and is gone. i also always couched this, that we are one of the best funded -- one of the best funded major plants in the nation if not the best. our percentages are incredibly high. >> this might be a question to supervisors elsbernd. with the average scenario we're talking about, even in 2015, we expect the contribution rate to be 27%? >> even if we earned 7.75%, it is still at least 26%, maybe 27% or 28%.
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this is pure speculation, where you said that the loss was about, in terms of peer comparison, a think our game is better than middle of the pack. is it to the 12% that we earned this year, we're probably in the top? >> we use very conservative standards if you want to compare us to other funds in the state of california or nationwide. and i say conservative meeting that we are not using smoke and mirrorse and mirrors. this five-year time frame is much shorter than many other funds. the other thing is with our rate of return, we assume the modest 7.35%. we were holding our breath. without that we would actually exceeded 13%. we did not get there, we were in the high 12's. supervisor chu: the current rate
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is about 15%? >> 13%. supervisor chu: okay. >> on the $2.5 billion plan compensation. supervisor chu: okay, and then a question about the actuarial spree that we were talking about all the different factors that go into driving that number, whether the population or other demographics. it is their one big driver that really makes a difference with what our obligations have to be? is it primarily gains on your pension, the rate that we are learning is not salary increases? >> i would say is a combination of both. every year, we calculate on the demographics side whether we had a gain or loss. if more
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